Wholesale Funding: A Required Management Tool

Over the past 18 months, many financial institutions have been subject to criticism with respect to using wholesale funding to support their balance sheets. In fact, many have been directed to reduce their levels of wholesale funding and to increase their levels of retail deposits–regardless of the costs or the fact that these funding sources pose little or no threat to the viability of the financial institution. Indeed, financial institutions that follow these directives to the letter could well be creating significant future risks to their balance sheets and impairing current profitability needed to regenerate capital levels or cover increased levels of operating expense.

These concerns may be misplaced, as they are based on the questionable assumption that financial institution failures, during this or prior economic downturns, have been due to rapid asset growth supported by wholesale funding sources such as brokered CDs and Federal Home Loan Bank (FHLBank) borrowings. The argument goes something like this: Had these sources not been available, these institutions could not have funded the toxic assets (either loans or investments) that led to their downfalls. This is similar to doctors treating symptoms and not the disease.